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Thursday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Jul 13, 2006, 08:20

The Irish Independent also reports that City Jet is set to launch its biggest ever expansion, having paid €174m for 23 new airplanes.

The Irish Times reports that a High Court judge has rejected claims by Ryanair that its pilots or their unions had engaged in bullying, intimidation or isolation of other pilots over conditions imposed by Ryanair relating to training on new aircraft.

The only evidence of bullying was by Ryanair itself, Mr Justice Thomas Smyth stated yesterday. He described as "most onerous and bordering on oppression" a condition requiring pilots to pay Ryanair €15,000 for training on new aircraft in 2004. The €15,000 was payable by pilots if they left the company within five years or if Ryanair was required to engage in collective bargaining within the same period.

In a strongly worded reserved judgment, the judge dismissed a bid by the private airline for orders aimed at identifying pilots who posted messages under codenames, such as "ihateryanair" and "cantfly, wontfly" on a pilots' website. Ryanair had claimed the messages showed evidence of wrongful activity against it and its employees.

The judge also made a finding of false evidence in relation to two members of Ryanair management who had given evidence at the hearing. He held that, when Ryanair set up an investigation to find out who was behind the website, the real purpose of that investigation was to "break the resolve" of pilots to seek better terms and conditions. There was no warrant for Ryanair's action in seeking assistance from gardaí on the matter, he added.

He rejected as "baseless and false" the evidence of Ryanair director of personnel Eddie Wilson in relation to the setting up the investigation. The judge also said there was no conspiracy in relation to the setting up of the website and it was not engaged in anything unlawful. There was "no actionable
wrong", he held, and dismissed Ryanair's application.

The issue of who will pay the ubstantial costs of the hearing will be decided later. Ryanair had sought a number of orders against Neil Johnston, an official with the trade union Impact, the Irish Airline Pilots' Association (Ialpa) and its British counterpart, Balpa.

The airline contended the defendants had a duty to identify persons identified by codenames on the Ryanair European Pilots' Association (Repa) website. It claimed the website was established and controlled by Ialpa and Balpa, which was denied by both associations. Ryanair also sought an order requiring the defendants to disclose all information within their knowledge or procurement relating to threats, intimidation and harassment of Ryanair pilots.

The proceedings arose from concerns by pilots about the conditions set by Ryanair in 2004 relating to flying new 737-800 aircraft. The judge said he was satisfied it was the changes in conditions that gave rise to the industrial unrest in 2004. He said pilots were offered training to convert to flying 737-800 aircraft.

Under the terms, they had to fund the €15,000 cost of training themselves. Payment of this would be deferred if they stayed with the firm for five years. However, it would be due immediately if pilots left the company or if Ryanair was compelled to engage in collective bargaining with the pilots' association or a trade union within five years.

"This was a most onerous condition and bears all the hallmarks of oppression," the judge said.
Mr Justice Smyth said he found Capt John Gale, one of a number of pilots subpoenaed by Ryanair to give evidence and who had denied claims of intimidation by pilots, to be a truthful witness.

The judge said he found that Capt Gale was in no way cold-shouldered by pilots and had received no intimidation. The judge said he was satisfied that whoever put about the rumour that Capt Gale was accusing another senior pilot, Capt John Goss, of disloyalty to Ryanair had done so without any basis whatsoever.

The judge also said he considered the evidence of Warwick Brady (who gave evidence for
Ryanair and who was with management based at Stansted airport in 2004) in relation to an alleged warning to Capt Gale by Capt Goss to be false evidence.

Referring to Capt Andrew Walters, another pilot subpoenaed by Ryanair and who denied being intimidated by any pilot in relation to taking up a post in Dublin, the judge said he was satisfied Capt Walters had had no conversation on the telephone with Capt Goss, as alleged by Ryanair.

He found Capt Walters to be truthful and reliable, and noted that the pilot had told the court he had never felt intimidated, isolated or threatened in relation to taking up the Dublin post.

The Irish Times also reports that increased competition has tightened profit margins for Irish banks selling mortgages, but a new report confirms that it continues to be a highly lucrative business for the sector.

Davy Stockbrokers states that while margins earned by the banks from the interest rates charged on mortgages have been significantly eroded over the past year, the sector has very much taken this in its stride.

According to analysts Emer Lang and Scott Rankin, positive trading statements from the banks in recent months continue to signal very strong growth in mortgage lending and good earnings growth.

Mortgage debt in the Republic reached more than €108 billion at the end of May, which is a 28 per cent increase year on year.

Bank of Ireland is the biggest mortgage lender with 20 per cent of the market and a loan book of €19.3 billion. Irish Life & Permanent is the second biggest at 18 per cent, followed by AIB at 17 per cent.

Davy estimated that these banks would earn an average yield of about 1 per cent this year, which is down from levels of about 1.2 per cent.

However, it pointed out that apart from the income earned from the mortgage books, it was cross-selling, through which the financial institutions can generate revenue from mortgage customers, that also impacted on the overall profitability of residential mortgage lending.

The report said that notwithstanding the upbeat noises from the sector, investors were concerned about the potential impact of a slowdown in mortgage lending volumes on bank profits.

They are also worried about the impact of intensive competition on mortgage lending margins, while there are concerns about a risk of mortgage holders getting into repayment difficulties against the background of rising interest rates.

Looking forward to 2008, Davy said it was reasonable to assume that gross domestic product (GDP) growth would slow from about 5 per cent in 2007 and that the sector earnings would also slow from the 11.6 per cent it is forecasting.

Consensus forecasts suggest that earnings growth from the European retail bank sector will average at below 8 per cent in 2008. "Barring an impairment shock, we think the Irish sector can readily deliver something similar," the report said.

The Irish Examiner reports that a second senior Cork County Council official has been investigated by his employers in relation to the controversial land negotiation in north Cork in which the council negotiated to buy land for €11.6 million which had been on offer just months earlier for €8m.

Property insiders have claimed the official has joined one of his senior colleagues in being suspended as the council continues with an internal investigation, but the local authority has refused to comment on that claim.

The investigation centres on the sale of the 20 acres of land at Deerpark, Charleville, and was sparked after complaints were made about an attempt by the county council to purchase it for €11.6m.

Pushkin Developments claimed that Cork County Council could have purchased the land for as little as €4m two years previously.

Last November, Pushkin had agreed to sell the land, which was already zoned for housing, to two Permanent TSB officials, regional manager Brian Cremin and Cork city branch manager Denis O’Reilly, for €8m.

Subsequently, Pushkin made a complaint when it found out that the men had already started negotiations to sell the land on to the council for €3.6m more.

County manager Maurice Moloney said four complaints had been received. He has appointed head of personnel John Walsh to conduct the investigation.

Meanwhile, it has been confirmed by the legal representative of Pushkin that the €8m fee asked of the Permanent TSB bankers has been paid in full.

However, Mr Cremin and Mr O’Reilly have initiated High Court proceedings against Cork County Council over its failure to complete the deal with them.

The Financial Times reports that Eurotunnel looked close to being declared insolvent after key talks on the company’s future broke down late Wednesday night without agreement on a restructuring plan.

The Channel Tunnel operator had been holding talks on Wednesday and on Tuesday in Paris with two creditor groups on how to restructure its £6.18bn debt. But they reached a deadline of midnight Wednesday night without reaching agreement.

The company had said that if there was no agreement it was likely to be declared insolvent by its auditors, KPMG, because there was no prospect of a restructuring deal ahead of a shareholder meeting due on July 27.

The company started the process of seeking bankruptcy protection from its creditors by launching a safeguard procedure in the French courts on Tuesday.

Some creditors have, however, been sceptical that the auditors would take more definite steps towards ruling the Franco-British company insolvent while it still had enough cash to maintain its obligations. The company has enough cash to last until January.

Eurotunnel had said the talks had to conclude on Wednesday night because its permission to hold restructuring talks without being ruled in breach of its loan agreements expired at midnight. The company could have sought fresh permission for talks – known as a waiver - but had said it would not because there was little prospect of further talks succeeding.

The talks’ failure was announced by the Ad Hoc Creditors’ Committee, which represents the majority of holders of the key £3.95bn debt from the middle of Eurotunnel’s debt pile.

It said that the talks with Eurotunnel and holders of the lowest-ranked £1.9bn of debt – known as the bondholders – had made progress.

It went on, however: “Agreement could not be reached within the deadlines imposed by Eurotunnel. The committee will continue its efforts to achieve a consensual restructuring.”

Jacques Gounon, chief executive, declared: “I fail to understand how an institution such as Deutsche Bank has maintained its unreasonable demands without taking into account the consequences on the 2,300 employees and 800,000 shareholders of Eurotunnel.”

Eurotunnel signed a restructuring agreement with the Ad Hoc Creditors’ Committee in May, but the agreement was rejected by the bondholders as offering them too little value for their holdings.

Any agreement would need the support of 75 per cent of each of Eurotunnel’s many debt tiers and 55 per cent of shareholders.

The French courts could now appoint an official to seek a restructuring deal among all the parties. If none can be reached and the senior creditors’ debt agreements are breached, the highest debt tiers can apply to take control of the undersea tunnel.

The FT also reports that Germany plans to use landmark corporate tax reforms to undercut its neighbours by offering companies some of the lowest business taxes in western Europe, Peer Steinbrück, finance minister said on Wednesday.

Once the tax changes take hold in 2008 German-based companies would pay average nominal tax rates below those in Britain, Spain, Italy and the Netherlands – all countries that currently enjoy more competitive rates than those in Europe’s biggest economy, he said.

“We want to make Germany...better able to compete with other tax locations surrounding us,” he told journalists in Berlin, speaking after Chancellor Angela Merkel’s cabinet had endorsed important aspects of the reform package.

Mr Steinbrück rejected suggestions that he was fuelling tax competition across Europe – something Germany has repeatedly complained about.

“We are now in the golden middle position on the league table of international tax rates,” he said, adding that his proposals would not lead to the dramatic tax revenue falls seen in other countries that have cut business taxes.

Nominal corporate tax rates are to fall from about 39 per cent at present to “slightly less than 30 per cent”, according to cabinet papers.

An average rate of about 29.2 per cent was expected, Mr Steinbrück said.

The success of the package of corporate tax changes is vital for Ms Merkel’s government, given the storm of protest that erupted last week over health reforms, another of the chancellor’s flagship projects.

On taxes the government faces more challenges ahead as eight leading business organisations issued a joint statement rejecting key aspects of the changes.

The nominal tax cuts “appear impressive on paper, but are unlikely to materialise because Mr Steinbrück is also planning to broaden the tax base, which means the effective tax rates may change only a little”, said Tanja Krause, tax expert at the BDI industry federation.

According to BDI estimates, effective tax rates might only fall marginally from 36 per cent at present to 32-34 per cent in future.

Ms Krause said the business community strongly opposed draft proposals to introduce a 50 per cent levy on companies’ interest payments, leases, rents paid and other costs. “This would be a tax on costs,” she said.

Mr Steinbrück attempted on Wednesday to head off this criticism by offering also to use other financial mechanisms to recoup revenues lost via the tax cut but Ms Krause said any step that involved taxing interest payments was unacceptable.

“It’s unclear whether anything good will emerge” from Mr Steinbrück’s package, she said.

The New York Times reports that last week, just days after he officially took on a new assignment to run BP’s business in the United States, Robert A. Malone took off for the Alaskan tundra to visit one of the hottest of the several hot spots in the global oil company’s increasingly troubled North American portfolio.

And that’s only the beginning of the traveling across the country he will have to do.

A native of Texas and a 32-year company veteran who until recently oversaw BP’s worldwide fleet of tankers, Mr. Malone was tapped to run BP America Inc., the nation’s largest oil and gas producer. The subsidiary, built around acquisitions like Amoco, has been rocked by a series of lapses and accidents over the last 15 months that have tarnished the company’s reputation.

The troubles include the worst oil spill on the North Slope of Alaska; an explosion at BP’s largest refinery, which killed 15 workers in Texas City, Tex.; the near loss of a $1 billion offshore platform; and most recently, accusations that BP traders manipulated the propane market.

While he was not responsible for the problems, Mr. Malone will have to answer criticism that BP neglected basic safety rules, fostered a culture of excessive risk-taking and failed to invest enough in critical infrastructure. He also faces the challenge of restoring BP’s credibility not just with the public but also with regulators from the Justice Department and the Labor Department, among others.

The misfortunes already have led to lengthy delays in production, hundreds of millions of dollars in repairs and settlements, and civil and criminal investigations by state and federal agencies. The paradox is that BP — known for navigating successfully in much more challenging places like Siberia, the Caspian and Africa — has faltered in the most open of economic environments.

Fadel Gheit, an analyst with Oppenheimer & Company in New York, said BP had a “streak of bad luck” but the company still enjoyed a solid reputation around the world. In the United States, though, “BP has this black cat that just keeps crossing its path — back and forth.”

To be sure, BP is logging record profits these days, posting net income last year of $22.34 billion, up 31 percent from 2004. It returned more than half — $12 billion — to shareholders in the first half of 2006 in dividends and stock buybacks. Shares of BP rose 10 percent in 2005, and are up another 10 percent this year.

Mr. Malone, a 54-year-old self-described extrovert, needs to bring a great deal of tact and urgency to his new job. The company’s slip in the United States is a setback for his boss, Lord Browne, BP’s chief executive, who once managed the business in America.

If not dealt with, the missteps threaten to undermine Lord Browne’s long efforts to give BP an environmentally friendly face and to deflect from BP some of the public’s hostile attitude toward the oil industry. Analysts say the recent events have chipped away at this carefully crafted image, at least in the United States.

“I am concerned that there are people questioning in various areas those values,” Mr. Malone said in a phone interview yesterday. “Part of what I want to do is address these issues. They are real and they are serious to BP America.”

Earlier this month, the company said that its second-quarter production had fallen 2.5 percent from the period last year, to four million barrels a day of oil equivalent, its fourth consecutive quarterly decline. Also, BP said it would take a further $500 million charge for compensation claims for the Texas City blast, in addition to the $700 million it set aside last year.

The United States accounts for nearly half the company’s global sales, half the company’s total assets and, with 40,000 workers, about half its employees. In turn, BP is a big player in America, accounting for 10 percent of this country’s oil output; its operations in the United States are bigger than those of Exxon Mobil, which is still much larger worldwide.

In many ways, BP’s changing of the guard in the United States is a public admission of its problems here. Mr. Malone’s predecessor in the United States, Ross Pillari, a 55-year-old executive for both North and South America, retired on July 1 after 34 years at BP.

“The United States has been BP’s weak spot, both in terms of its safety record and on poor maintenance issues,” said Lanny Pendill, an analyst at Edward Jones in St. Louis. “There’s also been a lack of oversight.”

The company, however, denied that Mr. Pillari’s retirement was related to the recent misfortunes. Mr. Malone’s strong safety record may have played a role in his appointment. In London, he oversaw BP’s oil and natural gas tanker shipments, a high-risk business that cannot afford accidents. During his tenure, BP shifted away from relying on chartered vessels and bought 48 double-hulled tankers. After the near collapse of the Thunder Horse offshore platform, he took over responsibility for all of BP’s floating structures in the Gulf of Mexico.

Before that, Mr. Malone was BP’s man running the Trans-Alaska Oil Pipeline. Mr. Malone brings “a proven record of success in the companies he has led,” Lord Browne said in a statement issued by the company.

Mr. Malone, who says “my priority is around safety,” will visit BP’s five refineries, starting with Texas City, in the next few weeks. He plans to return to the site of the oil spill in Alaska in two weeks and expects to drop in on all the company’s major plants within three months.

“I like to get out with employees,” he said. “I need to see things for myself.”

In his new job, Mr. Malone will have to manage the company’s latest stumble — federal authorities charged late last month that BP manipulated the price of propane two years ago by cornering the market through its dominant position.

The scam was short-lived, and the traders lost $10 million. But the allegations hit at the heart of the company’s sizable and very lucrative trading business. BP disputes the charges.

In Texas City, BP faces criminal charges after an explosion in March 2005 at its refinery, the third-biggest in the United States, killed 15 workers and injured 180. A preliminary investigation found “systemic lapses in safety culture” at the refinery, which had a long history of accidents and management slip-ups.

BP swiftly accepted responsibility for the accident. Lord Browne visited the site the morning after the blast, replaced the plant’s manager and approved about $1 billion in new investments in repairs and safety improvements. BP said it also quickly settled with the families of the dead and injured workers. Still, the company was fined $21.3 million.

A federal agency investigating the blast has not ruled out interviewing Lord Browne before releasing a final report by the end of the year. Earlier this year, the company was fined $2.4 million for “unsafe operations” at another refinery in Toledo, Ohio. BP is contesting that fine.

“It is difficult to say if this is a BP-wide issue,” said Craig Pennington, the director of the global energy group at Schroders in London. “But they appear to cut corners for the sake of short-term profit maximization. If you are a serial underspender in a refinery, it will come back to haunt you.”

Just three months after the refinery accident, after Hurricane Dennis swept through the Gulf of Mexico, Thunder Horse — a huge new offshore platform that was about to start production — began tilting into the waters, listing at a 20-degree angle. The company blames a failure in the platform’s hydraulic system.

One year later, Thunder Horse remains hobbled with problems. The company, which spent $250 million in repairs, expects production to restart by the end of the year. But analysts suspect that a recent admission that two subsea manifolds were found to be leaking might further delay the start of production.

Mr. Malone also must contend with criminal charges against BP in connection with the large oil slick that spread across the Alaskan tundra in March, after a corroded pipeline operated by BP broke and spilled about 4,800 barrels, or about 200,000 gallons, of crude oil. Its local subsidiary, BP Exploration Alaska, had been fined several times in earlier cases, most recently $1.2 million in 2004. Now, the federal Department of Transportation, responsible for pipeline safety, is looking into the company’s maintenance practices.

The company strongly denies it has skimped on maintenance and said it increased the number of inspections in recent years.

Yet the pipeline problem in Alaska echoes a chorus of complaints lodged against BP in recent years over the construction of a major pipeline linking the Caspian Sea to the Mediterranean port of Ceyhan in Turkey.

BP is being investigated by the Environmental Protection Agency for violations of air pollution rules, by the Labor Department for unsafe work practices, and by the federal Chemical Safety and Hazard Investigation Board for its industrial safety practices. The F.B.I. and the Justice Department are looking into the trading allegations.

While BP is cooperating with all these investigations, it strongly rejects any suggestion that it has a companywide problem. “These are unrelated incidents,” said Ronnie Chappell, a BP spokesman.

BP has had a large presence in North America since the 1970’s. But the company’s big push came with Lord Browne’s purchase of Amoco in 1998 for $52 billion, at the time the largest-ever merger in the oil industry. In 2000, BP bought another American company, Atlantic Richfield, for $26.8 billion.

But along with the assets, BP also inherited the problems. “There is a lot on their plate that they need to sort out,” Mr. Pennington said. Meanwhile, he added, “it’s all incredibly embarrassing for them.”

The NYT says that the nation’s trade deficit edged slightly higher in May, pushed up by soaring oil prices. But a surge in American exports helped keep the imbalance between exports and imports in check, suggesting that trade is starting to stabilize.

The Census Bureau said in a report yesterday that the difference between what Americans export and import grew to $63.8 billion in May, about $500 million more than in April. Though the deficit was not quite as large as many economists had forecast, it was still 13 percent larger than the $56.6 billion recorded in May 2005.

But economists noted that because energy prices exaggerated the overall deficit figure, the trade imbalance report was not as grim as it appeared at first glance. In fact, exports reached a record high. And when energy prices are removed from the trade gap calculation, the numbers suggest the imbalance is actually leveling off.

Imports of crude oil jumped by 17 percent in value in May, or $2.8 billion. Oil prices climbed $4.92 a barrel, the largest month-to-month increase the Census Bureau has recorded since 1990. The surge in oil prices overshadowed a healthy gain in American exports, which reached a record level of $118.7 billion.

Exports of industrial materials like metals and plastics rose, as did exports of civilian aircraft, a more volatile sector but one that contributes heavily to trade figures.

“The underlying trend seems to be toward stabilization,” Stephen Stanley, chief economist with RBS Greenwich Capital, said, noting that exports have been on the rise in recent months. “If we ever saw a sustained period of steady energy prices, I think we’d see at least stabilization, perhaps a little improvement in the trade deficit.”

The Census Bureau report also showed that the ever-expanding trade deficit with China, which many American politicians contend is a function of China’s undervalued currency, grew by 4 percent in May, reaching $17.7 billion. China has an increasingly one-sided trade relationship with the rest of the world as well: on Monday it reported an overall surplus of $14.5 billion for June, its largest on record.

Economists have warned that for both countries, such large imbalances are unsustainable. “We’re both dancing on the Titanic here,” said Ethan Harris, chief United States economist for Lehman Brothers. “Still, it took a long time for the Titanic to sink.”

Many economists see the American trade imbalance moderating along with the economy, meaning that for the first time in two years, the steadily growing gap between imports and exports could begin to stabilize. If growth slows, as most economists predict it will, Americans will make fewer purchases, and demand for foreign goods will shrink. At the same time, higher gas prices could cause Americans to cut back on gasoline consumption.

“We are really shipping money out of this country hand over fist,” said Joel L. Naroff, president of Naroff Economic Advisers. “And I don’t know how long you can keep spending this kind of money without ultimately there being significant adjustments.”

But in last month’s trade report, there were no signs that demand for oil was on the decline. The number of barrels of oil imported each day hit 10.4 million, the highest level since October.

Another factor that could help contain the trade deficit is growth overseas.

“With slower U.S. growth and the rest of the world carrying on pretty much as it was, the trend for the U.S. trade deficit does look better,” said Simon Hayley, senior international economist for Capital Economics.